Highlights of Ecuador A wrap-up of 2010 and a forecast for 2011

Transcription

1 Highlights of Ecuador A wrap-up of 2010 and a forecast for 2011

2 1. Synopsis Ecuador s economic growth, as measured in terms of the variation in GDP went from 0.98% in 2009 to 3.3% in 2010, according to official data. Inflation reduced from 4.31% in 2009 to 3.3% in As of February 2011, the accumulated variation of consumer price index is 1,24%. During 2010, the rate of growth of the Ecuadorian economy was supported by higher oil prices, as well as a recovery in the private consumption and the domestic credit. Nonetheless, deficits in the public accounts and in the trade balance should be noted. The Central Bank of Ecuador (CBE) has announced a 5.5% rate of growth for the year 2011, which will be supported by an increase in the investment of the national government, which will highly depend on the ability to obtain the necessary funds to carry out projects, and the international oil prices. As described below a several laws were amended and/or created to meet the constitutional rules. 2. Political Environment During 2010, the Ecuadorian government had to deal with uprisings of Ecuadorian natives and citizens, the loss of most of its representatives in the National Assembly, a partial blockade of important bills and the rise of the police troops on September 30. On the other hand, the results of the transportation plan developed over the last three years has helped to strengthen the ties between people and markets, which is shown in the current networking generated by the new and improved system of roads, bridges and airports. The following laws were approved by the National Assembly during the year 2010: National System of Public Data Registration; Education; Decentralization Territoriality; Public Service; Reforms to the Law on Food Sovereignty; Reforms to the Hydrocarbons Law; Reforms to the Internal Tax Regime Law; Code for Planning and Finance; Reforms to the Law to Prevent Laundry of Assets; Production Code.

3 3. Economic Performance, Tax and Labor Legislation GDP According to data provided by the CBE, Ecuador s GDP for 2010 was close to USD 57.0 billion, which represents a 3.3% growth from However, the following sectors experienced negative variation rates in 2010, compared to the 2009 s first semester: mining and oil (-5.74%) and manufacturing of oil refined products (-30.63%), also, the supply of power and water (-8.8%) and agriculture (-0.3%). On the other hand, the sectors showing the highest levels of growth in 2010 were: trading (7.11%), manufacturing (4.53%) and construction (4.32%). Between 2000 and 2009 Ecuador s average annual growth was around 4.7%. Trade Balance and Balance of Payments Foreign trade ended 2010 with a negative balance; according to statistics based on CBE figures, Ecuador closed the year with a trade deficit of approximately USD 2.0 billion, almost ten times the negative balance of the prior year. This is explained by the difference established between the country s accumulated exports for approximately USD 17.4 billion and the accumulated imports for approximately USD 19.4 billion. The significant increase in imports, especially for consumption, originates the important deficit in the Trade Balance for the first time since the beginning of the dollarization scheme in 2000, with a minor deficit in Among these imports are capital assets such as pipes used in oil extraction, trucks for transportation, vehicles and generators for alternate power. On the other hand, the increase in exports is mainly originated by the recovery of oil prices in the international market. Similarly, market prices rose for other traditional products (coffee, shrimp, cocoa,) and nontraditional products (flowers, wood, mining products, vehicles and other metal manufactures) exported by Ecuador. Imports are mainly related to products that Ecuador lacks to provide nationally, such as high technology devices, and other goods bearing lower prices than those locally produced. It is worth mentioning that local industrial companies based their production mostly on imported raw materials. Therefore, there was a higher increase in imports, which is supported by the increase in the accumulated demand and the gradual revoke, at beginning of the year, of the safeguard of the balance of payments implemented in the year In the first month of 2011, the trade balance was negative at USD 100 million. Only non-oil related trade balance is negative by USD 650 million.

4 The crisis that hit the world s most developed countries had a direct impact on the remittances received by families of Ecuadorian emigrants. During the first three quarters of the year, the remittances showed a decrease of 5.5%, mainly, for the impairment in the labor situation in Spain and Italy, where a large portion of Ecuadorian immigrants is located. Double Taxation Agreements Ecuador has signed tax treaties, which provide relief from double taxation for individuals and/or companies, with Brazil, Belgium, Chile, France, Germany, Italy, Romania, Spain, Canada, Mexico, Switzerland and the nations of the Andean Community (Colombia, Peru and Bolivia). Foreign Debt Funds obtained from the Andean Development Corporation (CAF) and the Chinese Development Bank (CDB) originated an increase in Ecuador s Foreign Debt. In December 2009, according to the figures published by the CBE, the public Foreign Debt reached USD 7.3 billion, which increased to USD 8.6 billion in Foreign debt represents approximately 16% of Ecuador s GDP. Also, the Internal Debt increased significantly from USD 2.7 billion in 2009 to USD 4.4 billion in The Ecuadorian government has issued important amounts of bonds to finance its activities; most of them were acquired by the Social Security System Institute (IESS). Due to disbursements received from CAF and CDB, the International Monetary Reserve showed constant figures throughout the year, and as of December 2010, it reached to USD 2.6 billion. In February 2011 the balance of the Reserve amounts to 3.9 billion. It is worth mentioning that, the Code for Planning and Public Finance establishes an annual planning system that must be used by all entities of the national government. The threshold for public debt reaches to 40% of the GDP; permanent expenses must be financed by permanent income, except for special situations; the issuance of short term bonds is authorized to control cash reserve levels. Foreign Investment In 2010, foreign investment was not relevant; it reached USD 250 million, according to Ecuador s Superintendence of Companies. However, the loans granted by China through CDB in the amount of USD 2.6 billion served for the construction of strategic projects, such as hydroelectric generation centrals. Also, an announcement was made that USD 3.0 billion will be invested in the short term (year 2011) for the exploitation of cupper.

5 Hydroelectric projects such as Coca-Codo-Sinclair, Toachi-Pilaton and Baba are still under construction. The renegotiation of the Concesion Contract for the construction and operation of Quito s airport was ended in the first months of In the same manner, private oil companies renegotiated their contracts with the government, switching from exploration and exploitation of hydrocarbons to a service contract. Petrobras cannot renegotiate the contract and will return the oil fields to the authorities. Mazar Hydroelectric project was completed at the year-end and its operations during the year 2011 will assist in supplying the national power demand. In a speech given by the Ecuadorian President at the beginning of March 2011, in a Forum event organized by Bloomberg, he mentioned that Ecuador is open to receive foreign investments and it is not a nationalized country. Ecuador offers to foreign investor the five following conditions: stability, strategic geographic position, megadiversity, the weather and its human capital. Country Risk At the end of 2010, Ecuador s country risk, as measured by the Emerging Markets Bond Index (EMBI), was approximated 910 points. By the time Ecuador s President, Rafael Correa, took office, the index was approximately 820 points. At the end of March 2011, the index reached 800 points. Labor, Unemployment and Poverty As of December 2010, Ecuador ended with a 6.1% unemployment rate, which represented a total of approximately 300,000 jobless individuals, according to Ecuador s National Statistics and Census Institute (INEC). However, the underemployment (lack of full-time or adequate employment) rate had a slight decrease from 50.5% in 2009 to 47.1% in As of June 2010, according to the information published by the INEC, the urban poverty reached 22.9% in 2010 compared with 21.8% in June Ecuador s minimum salary was increased by USD 24 in Therefore, the minimum salary reached USD 264 for the year (Employers are concerned for a potential increase in the underemployment level due to the increase in the basic salary, as well as the permanent pressure on the formal contracting of labor). Inflation According to the INEC, inflation reached 3.3% in 2010, a reduction from 4.31% in Monthly inflation rates for October and November 2010 were 0.2%. The areas with the highest inflation rates during 2010 were: Alcoholic beverages with 6.14%, food and non-alcoholic beverages with 5.85% and restaurants and hotels with 4.25%.

6 Interest Rates As from the second semester of 2010, the financial sector increased its loans to the private sector as a result of some measures taken by the authorities, among them, the increase of the tax on remittances abroad from 1% to 2% at the end of 2009, as well as the enhancement of the basis to calculate the minimum coefficient of domestic cash resources, which originated the partial repatriation of the assets maintained abroad by the financial institutions. The sustained increased of the public financial institutions in the sector should be noted. The channeling of the stimulus encouraged at the end of the year 2009, through the public banking, as well as the creation of the Bank of the Social Security Ecuadorian Institute (BIESS). have supported its strengthening. In 2010, corporate lending and borrowing interest rates averaged 10% to 8.5%, respectively. On the other hand, interest rates on consumption lending varied between 18% and 21%, in Tax legislation In November 2010, the National Assembly approved the Production Code, a government initiative that seeks to attract new investments and increase current production levels, which also added the concept of a living wage. Companies that generate profits must pay a living wage, which is close to USD 360 a month, to individuals earning a lower amount. The Production Code also includes incentives, among them, a progressive reduction in the percentage of annual income tax from 25% to 22% and the total exemption of income tax payable,as well as annual tax prepayments for a period of five years for new investments in sectors such as fresh food, pharmaceutical and others, as long as they are located in urban areas other than the cities of Quito and Guayaquil. 4. Prospects for 2011 The Ecuadorian government announced its multi-year plan covering the period , in which it mentions that, while the dollarization scheme allowed obtaining stability, it is not absolute. Thus, it is necessary that the level of incoming dollars be greater than the output in order to maintain sufficient resources in the economy to sustain the dynamism between production and employment. Preventing the outflow of currency is a complex task for the government. Preventing imports, or if they become expensive, could reduce the number of jobs within the commercial sector. If consumers pay higher prices for imported goods, neighboring governments could ask that we review our strategies as those may affect their economies.

7 In its multi-year plan, the government seeks to maintain oil exports, which along with tax revenues are the main sources of income; a 10% increase is expected until the year 2013 and a decrease of 5% in the year The government s estimations indicate a price of oil export between 73 to 78 dollars in the four years to overcome the gap; however, the level of investment in the sector and the limitation of quotas imposed by the Organization of the Petroleum Exporting Countries (OPEC) must be considered. Current daily oil production is lower than 200,000 bpd for 2013; the government intends to reach 250,000 bpd. Controlling of imports and attempting to double the exports of non-traditional products would allow the reversal of the trade deficit for the year Based on all of the above, a modest economic recovery is expected due to the small increase observed in the investment and domestic demand and in exports, in line with developments in the oil sector. Besides, a recovery in private consumption is also expected, boosted by increased government transfers, credit and wages. However, persistent unemployment and the weak recovery of remittances prevent a further increase in domestic demand. Ecuador s economy is expected to grow by 4%, according to the CBE figures. 5. PwC in Ecuador PricewaterhouseCoopers has been present in Ecuador since During these past 42 years, we served the most prestigious local and foreign entities operating in Ecuador. We are the leading firm in our line of business, with a staff comprised of a large number of professionals residing in the cities of Quito and Guayaquil. The PricewaterhouseCoopers Industry Focus principle enhances our effectiveness. Clients benefit from access to professionals who have relevant industry knowledge and who can tailor solutions to the client s specific needs. PricewaterhouseCoopers industry programs cover the main economic sectors: Financial Services, Energy and Utilities, Retail and Consumer, Industrial Products and Services, Technology, Entertainment and Media and Government Services. As our main objective is to assist our clients in being successful, we welcome any questions you may have regarding our services in general or the specific information described above.

8 Contact us Quito Av. Diego de Almagro N32-48 y Whimper. Planta Baja. T: (593-2) F: (593-2) Guayaquil Carchi 702 y Av. 9 de Octubre. Segundo Piso. T: (593-4) F: (593-4) PricewaterhouseCoopers del Ecuador Cía. Ltda. All rights reserved. In this document, PwC refers to PricewaterhouseCoopers del Ecuador Cía. Ltda., which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate and independent legal entity.